Tutorial Chapter III Cash Flow and Financial Planning

# Tutorial Chapter III Cash Flow and Financial Planning

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## Tutorial Chapter III Cash Flow and Financial Planning

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1. Tutorial Chapter III Cash Flow and Financial Planning

2. Cash Flow andFinancial Planning - Goals Tax depreciation procedures The firm’s statement of cash flows Financial planning process (short-term and long-term) Cash-planning process (cash budget) The pro forma income statement The pro forma balance sheet

3. Depreciation = systematic charging of a portion of costs of Fixed Assets against revenues over time. • The amount is determined by using Modified Accelerated Cost Recovery System (MACRS) • Depreciable value • Depreciable life

4. Statement of CF • Summarizes the firm‘s CF over a given period of time CF is divided into - operating flows - investment flows - financing flows Inflows – Decrease in A, Increase in Liab., EAT, Depreciation, Sale of stock Outflows – Inc. in A, Dec. in Liab., Net loss, Dividends paid, Repurchase of stock

5. Formulas CF from operations = EAT + Depreciation Operating CF = EBIT*(1-T) + Depreciation = NOPAT + Depreciation FCF = OCF – NFAI – NCAI NFAI = Change in net fixed A + Depreciation NCAI = Change in current A – Change in (accounts payable + accruals)

6. Financial planning process Long-term financial plans – cover a 2 to 10 years period, Strategic decisions Short-term financial plans – cover 1 to 2 years period, Operating financing Cash Budget = a statement of a firm‘s planned inflows and outflows of cash. As a basis is used the sales forecast provided by the marketing department.

7. Financial planning process Profit planning – Pro-Forma Statements Pro-Forma Statements = projected income statements and balance sheets, two inputs are needed - the sales forecast and the financial statements for the preceding year. Preparing Pro-Forma Income Statement – percent-of-sales method Preparing Pro-Forma Balance Sheet – judgmental approach

8. Exercise 3 - 3 Determine OCF Sales of \$2,500,000 Cost of goods sold \$ 1,800,000 Operatingexpenses \$300,000 Depreciationexpenses \$200,000 Tax rate 35%

9. Exercise 3 – 3 Solution OCF = [EBIT * (1-t)] + Depreciation EBIT = \$2,500,000 - \$1,800,000 - \$300,000 = \$400,000 OCF = [\$400,000 * (1 - 0.35)] + \$200,000 = \$460,000

10. Exercise 3 - 4 Calculate FCF Increase in fixed assets \$300,000 Depreciation\$200,000 Increase in current assets \$150,000 Increase in accounts payable \$75,000 OCF was \$700,000

11. Exercise 3 – 4 Solution FCF = OCF - NFAI - NCAI NFAI = change in fixed assets + depreciation NFAI = \$300,000 + \$200,000 = \$500,000 NCAI = change in currentassets - changein (acc. payable + accruals) NCAI = \$150,000 - \$75,000 = \$75,000 OCF = \$700,000 FCF = \$700,000 - \$500,000 - \$75,000 = \$125,000

12. Exercise 3 - 5 Estimate net profits before taxes Sales forecastof \$650,000 Fixedcostsof \$250,000 Variable costs 35% of Sales Operating expenses include fixed costs of\$28,000 and variable costs 7,5% of sales Interestexpenses are \$20,000

13. Exercise 3 – 5 Solution

14. Problem3 - 2 Accounting cash flow Earningsaftertaxes \$50,000 Depreciation\$28,000 Amortization\$2,000 What was the firms accounting cash flowfromoperations?

15. Problem3 – 2 Solution Earningsaftertaxes \$50,000 Plus: Depreciation \$28,000 Plus: Amortization \$ 2,000 Cash Flow from operations \$80,000 Note: Deprec. and Amor. are non-cash charges. Depreciation is charged against tangible assets, amortization is charged against intangible assets.

16. Problem3 - 4 Depreciation and accounting Cash Flow Asset original cost of \$180,000 has a 5-year MACRS recovery period, now in 3rd year(19%) Accruals\$15,000 Currentassets \$120,000 Interestexpense \$15,000 Sales revenue \$400,000 Inventory\$70,000 Total cost before deprec., int. and tax \$290,000 Tax rate on ordinary income 40%

17. Problem3 – 4 Solution

18. Problem3 - 5

19. Problem3 – 5 Solution

20. Problem3 - 7 Cash receipts Sales of \$65,000 in April, \$60,000 in May Sales of \$70,000 in June, \$100,000 in July and in August Half of sales are for cash and the otherhalf is collected evenly over next 2 months What are firms expected cash receipts for June, July and August? Use Excel sheet (Problem3-7.xlsx)

21. Problem3 – 7 Solution

22. Problem3 - 8 Cash disbursement schedule for April, May and June Sales from February: \$500,000 \$500,000 \$560,000 \$610,000 \$650,000 \$650,000 Purchases: 60% of next month’s sales, 10% in cash, 50%after 1 month, 40% after 2 month Rent: \$8,000 per month Wages and Salaries: Fixed \$6,000/month + 7% of sales Taxes: \$54,500 due in June Fixed asset outlays: New equipment in April for \$75,000 Interest payments: A payment of \$30,000 is due in June Cash dividends: \$12,500 will be paid in April Principal payments and retirements: None Use Excel sheet (Problem3-8.xlsx)

23. Problem3 – 8 Solution

24. Problem3 - 14 Pro forma incomestatement Use the percent of sales method toprepare a pro forma income statement Use fixed and variable cost data todevelop a pro forma income statement Use Excel sheet (Problem 3-14.xlsx)

25. Problem3 – 14 Solution a)

26. Problem3 – 14 Solution b) • Usingfixedandvariablecostshigher profit isprojected • Percentofsalesmethodis more conservative, butfixed and variablecostsmethod is more accurate

27. Problem3 - 17 Pro forma balance sheet Analyzeexpected performance andfinancing needs for 2008 - 2yrs ahead Prepare pro forma balance sheetdatedDec. 31. 2008 Discuss the financing changes suggested by thestatementprepared Use Excel sheet (Problem 3-17.xlsx)

28. Problem3 – 17 Solution Company must arrange for additional financing of at least \$775,000 over the next two years based on the given constraints and projections